Safeguard the financial security and well-being of your disabled loved ones
Crafting an estate plan for disabled beneficiaries is a pivotal undertaking, typically involving the utilization of trusts. Trusts act as a secure conduit to transmit and safeguard assets for current and future disability-related expenses, while maintaining eligibility for disability support. Let’s explore the integral factors and possibilities when constructing an estate plan for a disabled beneficiary.
Understanding Trusts for Disabled Beneficiaries
A trust signifies a relationship where an individual, known as the settlor, transfers assets to another individual, known as the trustee. The trustee holds these assets for the benefit of a third party, the beneficiary. Trusts can come into existence during the settlor’s life (inter vivos) or upon the settlor’s death (testamentary). They can be discretionary or non-discretionary, a distinction grounded in the degree of power and control the trustee and beneficiary wield over the trust’s assets and administration.
The Henson Trust: A Crucial Estate Planning Tool
When leaving an inheritance for a disabled beneficiary, it is generally inadvisable to give the assets directly to them. Instead, consider placing any inheritance into a discretionary trust, commonly known as a “Henson trust”. This trust is typically stipulated in the parent’s will, making it a testamentary, discretionary trust.
The unique attribute of a Henson trust is its discretionary nature. The trustee holds ultimate discretion over trust payments to the person with disabilities for whom the trust was established. This prevents the beneficiary from single-handedly dismantling the trust or forcing the trustee to make payments.
Trusts and Disability Assistance: A Vital Connection
Trusts remain a potent instrument in estate planning, allowing individuals with disabilities (PWDs) to keep their eligibility for disability benefits. Two primary forms of trusts are involved:
- Non-Discretionary Trusts: A PWD can benefit from up to $200,000 in a non-discretionary trust. Here, the trustee holds assets in trust for the individual but does not possess absolute discretion over asset management.
- Discretionary Trusts (Henson Trusts): A PWD can be the beneficiary of any amount in a discretionary trust while retaining eligibility for disability benefits.
Drafting Trusts: What You Need to Know
Creating a discretionary trust involves considering several factors, including beneficiary selection, trust structure, and potential asset control issues. Furthermore, trust payments can affect disability assistance eligibility unless used for “disability-related costs” or to foster independence.
Selecting a Trustee: A Delicate Decision
Choosing a trustee requires thoughtful consideration of factors such as their understanding of Trust Law, their location, their relationship with the disabled beneficiary, and potential conflicts of interest.
Tax Considerations for Trusts
Trusts bring several tax considerations to the table, including the “preferred beneficiary election”, the “21 Year Disposition Rule”, and annual T3 trust returns. It’s vital to ensure the discretionary testamentary trust meets the criteria to be regarded as a “qualified disability trust” (a “QDT”) to gain access to graduated tax rates and potential access to the principal residence exemption.
Remember: Having the right type of will is crucial for parents of a disabled child. This helps avoid the interference of the Public Guardian in managing the trust property for a disabled individual.
At Ratcliff, we’re committed to guiding you through these intricate decisions, ensuring the best possible outcome for your family.